Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

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"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Wednesday, 3 December 2014

Melbourne Continues to Hammer High-Rise Oversupply

GDP at 1 percent in Q3?

Further GDP partials were released today showing that a trade surplus on goods and services will join inventories and other business indicators by kicking in a tidy 0.8 percentage points for the GDP result in Q3 (don't mention foreign debt, though!) so we can expect that the headline GDP result for the third quarter will be a solid one.

Also released today were details of a huge pick-up in the headline Building Approvals data. There's a bit to look at here, so let's jump straight into it in five short parts...

Part 1 - National Approvals Rebound

Building approvals market commentary is frequently myopic, hence the desired residential construction boom has been proclaimed as "failed" or "over" approximately every second or third month throughout the course of the entire cycle.

The data will always jump around or gyrate on a monthly basis since that is the nature of the beast, and of course it is the medium-term trends that are of importance.

The headline data for October 2014 showed the number of house approvals essentially "flat" at a seasonally adjusted 9380 (a pretty solid number, but gently trending down over time), and an enormous 31.3 percent increase in other approvals - being attached dwellings - at a seasonally adjusted 7532, following an equivalently 'dramatic' 24 percent decline in the month of September.

This takes the rolling annual number of approvals back up a little to more than 197,500, which is close to the all-time record high. The absolute size of Australia's population is not directly relevant to this figure, but the changes in household formations and demand for housing are.

The split of the national approvals data shows that this cycle has largely been driven by attached dwellings, while detached house approvals are now trending steadily lower as the monthly data rolls in.


The Housing Industry Association (HIA) estimates that Australia needs to construct ~180,000 dwellings per annum in order to satisfy new demand.

In that context building approvals tracking at ~197,000 is good but not amazing, especially given that for units and apartments in particular the completion rate might only be ~90 percent (or perhaps still less if market sentiment goes into reverse gear).

In terms of the total value of building approvals, it is commonly assumed by market commentators that attached dwellings must automatically be worth fewer dollars per unit and thus the residential construction boom will be of little meaningful value to the economy.

This is not necessarily the case for reasons explained later. 

In the event the rising value of dwellings in Sydney, Melbourne, Perth and now Brisbane has ensured that the total value of building approvals has soared to more than $4.96 billion in October 2014, a huge result and the second highest monthly figure ever recorded.


With prices and activity remaining relatively static in the southern states of South Australia and Tasmania, the growth in the total value of residential building approvals has been driven almost entirely by the four most populous states. 

Part 2 - State Level Approvals - Victoria Oversupply?

From the state level data we can source useful indicators for where we might locate dwelling oversupply risk, and here we see that Victoria is off the approvals races, with detached house approvals clearly turning up once again despite several years of elevated levels of construction.

House approvals have also been trending up steadily in Queensland, New South Wales and Western Australia, although in historical terms Sydney has been coming from a terribly low base, hence the inherent detached housing supply shortage in that capital city.

South Australia was the only state or territory to record a decline in total dwelling unit approvals the month of October 2014, which is fairly logical and unsurprising given that Adelaide dwelling prices have under-performed against inflation for fully six years, and as such new construction has become neither more attractive nor more profitable to developers. 


Moving on to units, as noted on this blog regularly over the past few months, Greater Sydney unit and apartments approvals are trending back down towards a comfortably manageable ~24,000, and at the state level that figure is now around ~30,000.

Victoria, however, is grappling with significant unit oversupply issues as we will explore in further detail below.

Queensland has also been approving a great many units too, although this trend does appear to be hitting a plateau at around ~20,000 according to that last six months of data available.


Part 3 - Capital City Approvals Highest Ever Recorded in October

Commentators variously describe the building approvals boom as being "over" or "weak" or "softening", but whichever angle you take or barrow you prefer to push, the total number of capital city approvals in October 2014 at 14,635 was the highest figure ever recorded in Australia's history.

Greater Melbourne is beginning to approve a serious number of houses again on a rolling annual basis, and Greater Perth is doing the same, despite the net interstate migration figures suggesting a significant slowing in the population growth of the mining states Queensland and WA.

Greater Sydney is also in a steady uptrend, but goodness knows we could desperately use more detached housing stock in the harbour city. 

Adelaide is tailing off along with so many other moribund economic indicators in South Australia, and the growth figures for other states are trifling on a national basis.


As for units and apartments, Sydney continues to trend down towards ~24,000 on a rolling annual basis as we have previously projected, a level of supply which can easily be absorbed by rampant population of growth approaching ~90,000 per annum in Greater Sydney. This is reflected in in ongoing low vacancy rates of around 1.5 percent in the Sydney metropolitan area.

Greater Melbourne already has an ominous looming oversupply of attached dwellings and October was another ripsnorter of a month for unit and apartment approvals, with another 2730 units approved. 

The housing market in terms of dwelling prices in Melbourne has had a long, strong run - perhaps too long and too strong - and now the new supply of stock just keeps on coming. 

There was welcome news for the Greater Brisbane housing market this month as the number of unit approvals tails back towards ~12,000 on a rolling annual basis, having threatened at an earlier juncture to get a little out of control.


People often ask whether the Melbourne oversupply is likely to be seen in townhouses, semis, boutique apartment blocks or high-rise units, so let's take a slightly more detailed look at Victoria as a very short case study.

Part 4 - Victoria Oversupply by Dwelling Type

Most Victorian building approvals are still of the detached housing type, but the red line below charts the phenomenal increase in approvals for high-rise dwellings (categorised here as 4 or more storeys) since 2009.

There has certainly been a strong upturn in the number of townhouses and semis approved, particularly those of 2 or more storeys, but these numbers pale into insignificance when compared to the monster oversupply of high-rise dwelling stock.

Despite high-rise approvals threatening to roll over more than once, October 2014 was yet another ripper of a month for high-rise approvals in Victoria with another 1784 units approved. 

The oversupply of this type of dwelling stock presents an increasingly clear systemic risk to the Melbourne housing market and is likely to end badly for many of those speculating in new high-rise developments. 


Although it is widely assumed from a macroeconomic perspective that there is less economic activity to be associated with high-rise construction, this is far from necessarily the case.

Since so many high-rise developments are located on inner-city brownfield sites with exorbitant land clearance and remediation costs - especially when compared to outer suburban greenfield sites where much of the detached housing is frequently located - the total value of building approvals in Victoria continues to rise sharply in aggregate.

Interestingly the total increase in the value of building approvals has largely been driven by the high-rise phenomenon, a trend which is even more significantly evident in the Sydney data.


Part 5 - The Outlook for Housing Markets and Construction

SQM Research released its stock on market data for the month of November 2014 which underscores the point that there remains in aggregate a glut of unit supply in Melbourne, tracking down slightly from above 47,000 dwellings on the market a year ago to a little over 44,000 today.

In Sydney, supply has declined over the past year to around 25,500, a stark contrast indeed with the Victorian state capital.

The below chart also puts the reported sizeable percentage increase in Darwin's stock on market into some perspective, with absolute numbers still tracking at well below 2000.


Finally for today, can we expect to see housing construction maintained at elevated levels over the next couple of years?

Yep, we think so.

The Reserve Bank of Australia (RBA) left the official cash rate on hold at 2.50 percent as expected for yet another month, rapidly approaching the central bank's record of holding for 20 consecutive months.  

The RBA's Statement has been copied, pasted and critiqued all over the internet, but since the Governor's media release is relatively short, the best option would probably be to read it yourself here!

Not too many surprises, overall. The RBA wants a lower dollar still, commodity prices are no longer considered to be historically high, and unemployment has edged higher.

With mortgage rates having declined markedly in recent years this has kept dwelling prices rising nationally, albeit it at a slower pace of late outside Sydney, and this plus the high volume of approvals in the pipeline should keep the level of residential dwelling construction ticking along for quite some time to come.

Futures markets are growing increasingly sceptical as to whether low interest rates are pulling hard enough for the economy and are already pricing in a 13 percent chance of a further cut at the next RBA Board Meeting in February 2015.

Implied yields remain below 2.50 percent for months and months...way out to Q2 2016, in fact.


We'll be back here later to look at the headline GDP result and what the National Accounts mean for household disposable incomes, interest repayments and more.

Also, as promised, we will also soon benchmark our 2014 calendar year capital city property market forecasts against the actual results, which will reveal that we could score a hit for 6 out of 7 markets, though we will clearly score a miss and be too low with our conservative +6 to +9 percent forecast for Sydney, which we acknowledged as a likely risk (we don't bother to hedge our bets by providing a wide range of forecasts).

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